BEMIS COMPANY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1 – Basis of Presentation
The accompanying unaudited consolidated financial statements have been prepared by Bemis Company, Inc. (the Company) in accordance with accounting principles for interim financial information generally accepted in the United States and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all the information and footnotes necessary for a comprehensive presentation of financial position, results of operations, and cash flows. It is management’s opinion, however, that all material adjustments (consisting of normal recurring accruals) have been made which are necessary for a fair financial statement presentation. The results for the interim period are not necessarily indicative of the results to be expected for the year. For further information, refer to the consolidated financial statements and footnotes included in the Company’s annual report on Form 10-K for the year ended December 31, 2005.
Note 2 – Accounting for Stock-Based Compensation
On December 15, 2004, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards No. 123(R), “Share-Based Payment” (FAS 123(R)), which significantly changed accounting practice with respect to employee stock options. The SEC delayed the mandated adoption date for public companies with a December 31 year end until January 1, 2006, at which point the Company adopted this accounting standard. FAS 123(R) requires that the Company measure the cost of equity-based service awards based on the grant-date fair value of the award. That cost will be recognized over the period during which an employee is required to provide service in exchange for the award or the requisite service period (usually the vesting period). No compensation cost is recognized for equity instruments for which employees do not render the requisite service. The impact of adopting this standard is insignificant to the Company’s results of operations since no new stock option awards have been granted since 2003 and nearly all stock options outstanding at December 31, 2005, were fully or partially vested.
Options are granted at prices equal to fair market value on the date of the grant and are exercisable, upon vesting, over varying periods up to ten years from the date of grant. Options for directors vest immediately, while options for Company employees generally vest over three years (one-third per year). The following table summarizes all stock option plan activity from December 31, 2005 to June 30, 2006:
| | Aggregate | | | | Per Share | | Weighted-Average | |
| | Intrinsic | | Number of | | Option Price | | Exercise Price | |
| | Value | | Shares | | Range | | Per Share | |
Outstanding at December 31, 2005 | | | | 2,143,378 | | $15.86 - $26.95 | | $ | 19.72 | |
Exercised | | $ | 1,579,000 | | (113,414 | ) | $16.16 - $22.04 | | $ | 16.28 | |
Outstanding at June 30, 2006 | | $ | 21,733,000 | | 2,029,964 | | $15.86 - $26.95 | | $ | 19.91 | |
| | | | | | | | | |
Exercisable at June 30, 2006 | | $ | 21,449,000 | | 1,987,964 | | $15.86 - $26.95 | | $ | 19.81 | |
The following table summarizes information about outstanding and exercisable stock options at June 30, 2006.
| | Options Outstanding | | Options Exercisable | |
| | Number | | Weighted-Average | | Weighted-Average | | Number | | Weighted-Average | |
Range of | | Outstanding | | Remaining | | Exercise Price | | Exercisable | | Exercise Price | |
Exercise Prices | | at 6/30/06 | | Contractual Life | | Per Share | | at 6/30/06 | | Per Share | |
$15.86 - $18.81 | | 1,315,494 | | 3.5 years | | $ | 17.81 | | 1,315,494 | | $ | 17.81 | |
$22.04 - $26.95 | | 714,470 | | 4.1 years | | $ | 23.78 | | 672,470 | | $ | 23.72 | |
| | 2,029,964 | | 3.7 years | | $ | 19.91 | | 1,987,964 | | $ | 19.81 | |
Stock options have not been granted since early 2003. The fair value of each stock option grant was estimated on the date of grant using the Black-Scholes option-pricing model with the following weighted-average assumptions: dividend yield 2.3%, expected volatility 29.2%, risk-free interest rate 6.75%, and expected lives 10.0 years.
In 1994 and in 2001, the Company adopted a Stock Incentive Plan for certain key employees. The 1994 and 2001 Plans provide for the issuance of up to 4,000,000 and 5,000,000 grants, respectively. Each Plan expires 10 years after its inception, at which point no further stock options or performance units may be granted. Since 1994, 3,932,910 and 3,699,162 grants of either stock options or performance units (commonly referred to as restricted stock) have been made under the 1994 and 2001 plans, respectively. Distribution of the performance units is made in the form of shares of the Company’s common stock on a one for one basis. Distribution of the shares will normally be made not less than three years, nor more than six years, from the date of the performance unit grant. All performance units granted under the plan are subject to restrictions as to continuous employment, except in the case of death, permanent disability, or retirement.
As of June 30, 2006, the unrecorded compensation cost for performance units is $35,905,000 and will be recognized over the remaining vesting period for each grant which ranges between December 31, 2006 and December 31, 2010. The remaining weighted-average life of all performance units outstanding is 2.4 years. Prior to the adoption of FAS 123(R) the Company maintained liability balances of $35,029,000 related to the portion of performance units for which compensation expense had been previously recognized. As these awards are
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considered equity-based awards under FAS 123(R), the Company has reclassified this balance from a liability classification to a component of additional paid in capital.
The following table summarizes all restricted stock unit activity from December 31, 2005 to June 30, 2006:
| | | | Number of | |
| | Aggregate | | Performance | |
| | Intrinsic Value | | Units | |
Outstanding shares granted at December 31, 2005 | | | | 3,069,163 | |
Shares Granted | | | | 346,143 | |
Shares Paid | | | | (142,869 | ) |
Shares Canceled | | | | (50,000 | ) |
Outstanding shares granted at June 30, 2006 | | $ | 98,671,000 | | 3,222,437 | |
| | | | | | |
Prior to the adoption of FAS 123(R), as provided for in FAS No. 148 “Accounting for Stock-Based Compensation—Transition and Disclosure (an amendment of FASB Statement No. 123)”, the Company chose to continue with its previous practice of applying the recognition and measurement principles of APB No. 25, “Accounting for Stock Issued to Employees” related to its outstanding options and performance units. The intrinsic value method was used to account for these stock-based compensation plans. If compensation expense had been determined based on the fair value method with the pro forma compensation expense reflected over the vesting period, net income and income per share would have been adjusted to the pro forma amounts indicated below:
| | Three Months Ended | | Six Months Ended | |
(dollars in thousands, except per share amounts) | | June 30, 2005 | | June 30, 2005 | |
Net income - as reported | | $ | 41,236 | | $ | 73,460 | |
Add: Stock-based compensation expense included in net income, net of related tax effects | | 2,123 | | 4,629 | |
Deduct: Total stock-based compensation expense determined under fair value, net of related tax effects | | (2,218 | ) | (4,779 | ) |
Net income - pro forma | | $ | 41,141 | | $ | 73,310 | |
| | | | | |
Basic earnings per share - as reported | | $ | 0.38 | | $ | 0.69 | |
Basic earnings per share - pro forma | | $ | 0.38 | | $ | 0.68 | |
| | | | | |
Diluted earnings per share - as reported | | $ | 0.38 | | $ | 0.68 | |
Diluted earnings per share - pro forma | | $ | 0.38 | | $ | 0.68 | |
Note 3 – Goodwill and Other Intangible Assets
Changes in the carrying amount of goodwill attributable to each reportable operating segment follow:
| | Flexible Packaging | | Pressure Sensitive | | | |
(in thousands) | | Segment | | Materials Segment | | Total | |
Reported balance at December 31, 2004 | | $ | 391,473 | | $ | 50,708 | | $ | 442,181 | |
| | | | | | | |
Business acquisition | | 111,114 | | | | 111,114 | |
Goodwill associated with Itap Bemis Ltda. which is now consolidated | | 11,396 | | | | 11,396 | |
Currency translation adjustment | | 16,728 | | | | 16,728 | |
Reported balance at December 31, 2005 | | $ | 530,711 | | $ | 50,708 | | $ | 581,419 | |
| | | | | | | |
Business acquisitions | | 5,943 | | 1,882 | | 7,825 | |
Currency translation adjustment | | 11,828 | | | | 11,828 | |
Reported balance at June 30, 2006 | | $ | 548,482 | | $ | 52,590 | | $ | 601,072 | |
The acquisition of the remaining minority interest of our three Mexican joint venture operations and the final adjustment to the purchase price of Dixie Toga, originally acquired in January 2005, resulted in the $7.8 million goodwill increase.
The components of amortized intangible assets follow:
| | June 30, 2006 | | December 31, 2005 | |
| | Gross Carrying | | Accumulated | | Gross Carrying | | Accumulated | |
(in thousands) | | Amount | | Amortization | | Amount | | Amortization | |
Contract based | | $ | 15,447 | | $ | (7,493 | ) | $ | 15,447 | | $ | (6,930 | ) |
Technology based | | 52,351 | | (14,984 | ) | 52,047 | | (13,513 | ) |
Marketing related | | 20,986 | | (4,601 | ) | 19,659 | | (3,677 | ) |
Customer based | | 54,854 | | (10,661 | ) | 50,395 | | (7,848 | ) |
Reported balance | | $ | 143,638 | | $ | (37,739 | ) | $ | 137,548 | | $ | (31,968 | ) |
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Amortization expense for intangible assets during the first six months of 2006 was $4.5 million. Estimated amortization expense for the remainder of 2006 is $4.2 million; for 2007 is $8.7 million; for 2008 through 2010 is $8.6 million each year; and $8.4 million for 2011.
Note 4 – Inventories
The Company’s inventories are valued at the lower of cost, determined by the first-in, first-out (FIFO) method, or market. Inventories are summarized as follows:
| | June 30, | | December 31, | |
(in thousands) | | 2006 | | 2005 | |
Raw materials and supplies | | $ | 169,742 | | $ | 161,110 | |
Work in process and finished goods | | 302,608 | | 276,331 | |
Total inventories, gross | | 472,350 | | 437,441 | |
Less inventory write-downs | | (17,689 | ) | (16,491 | ) |
Total inventories, net | | $ | 454,661 | | $ | 420,950 | |
Note 5 – Restructuring of Operations
In January 2006, the Company committed to a plan to close five flexible packaging plants: Peoria, Illinois; Denmark and Neenah, Wisconsin; Georgetown, Ontario, Canada; and Epernon, France. The closure of these plants, together with related support staff and capacity reductions within the flexible packaging business segment, is expected to reduce fixed costs and improve capacity utilization elsewhere in the Company. During the second quarter of 2006, the Company incurred charges of $3.9 million for employee severance, $4.0 million for accelerated depreciation, $0.6 million for equipment and employee relocation, and $0.2 million for other related costs.
Also in January 2006, the Company committed to a plan to close a pressure sensitive materials plant located in Hopkins, Minnesota. The closure of this plant, together with related support staff and capacity reductions within the pressure sensitive materials business segment, is expected to reduce fixed costs and improve capacity utilization. During the second quarter of 2006, the Company incurred charges of $0.1 million principally for employee severance.
Manufacturing activity has been concluded at three of the six manufacturing plants identified for closure with customer order fulfillment absorbed by other facilities within the Company. While closure of the remaining three facilities is expected to be accomplished during the second half of 2006, final relocation of equipment and employees, disposal of manufacturing sites, and final settlement of pension related issues may not be accomplished until 2007.
For the second quarter of 2006, a total of $4.4 million has been charged to other costs (income) and $4.4 million has been charged to cost of products sold within the consolidated statement of income. For the first six months of 2006, a total of $8.9 million has been charged to other costs (income) and $11.2 million has been charged to cost of products sold within the consolidated statement of income. The accrued liability at June 30, 2006, is $1.2 million. Total costs of $35.0 million are expected for this restructuring effort, of which $31.0 million will be incurred by the flexible packaging segment, $1.8 million for the pressure sensitive segment, and $2.2 million for corporate relocation. Net cash cost is expected to be $18.3 million and non-cash cost is expected to total $16.7 million.
An analysis of the restructuring and related costs activity follows:
| | | | Facilities | | | | Total | |
| | Employee | | Consolidation | | Accelerated | | Restructuring | |
(in thousands) | | Costs | | or Relocation | | Depreciation | | and Related Costs | |
2006 Activity – Year-To-Date | | | | | | | | | |
Reserve balance at December 31, 2005 | | $ | 0 | | $ | 0 | | $ | 0 | | $ | 0 | |
Total net expense accrued | | | | | | | | | |
Flexible Packaging | | (7,706 | ) | (1,261 | ) | (10,724 | ) | (19,691 | ) |
Pressure Sensitive | | (326 | ) | (33 | ) | (29 | ) | (388 | ) |
Charges to accrual account | | | | | | | | | |
Flexible Packaging | | 6,802 | | 1,261 | | 10,724 | | 18,787 | |
Pressure Sensitive | | 7 | | 33 | | 29 | | 69 | |
Reserve balance at June 30, 2006 | | $ | (1,223 | ) | $ | 0 | | $ | 0 | | $ | (1,223 | ) |
| | | | | | | | | |
2006 Activity – Second Quarter | | | | | | | | | |
Reserve balance at March 31, 2006 | | $ | (297 | ) | $ | 0 | | $ | 0 | | $ | (297 | ) |
Total net expense accrued | | | | | | | | | |
Flexible Packaging | | $ | (3,860 | ) | $ | (825 | ) | $ | (3,992 | ) | $ | (8,677 | ) |
Pressure Sensitive | | (58 | ) | (33 | ) | (23 | ) | (114 | ) |
Charges to accrual account | | | | | | | | | |
Flexible Packaging | | 2,985 | | 825 | | 3,992 | | 7,802 | |
Pressure Sensitive | | 7 | | 33 | | 23 | | 63 | |
Reserve balance at June 30, 2006 | | $ | (1,223 | ) | $ | 0 | | $ | 0 | | $ | (1,223 | ) |
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Note 6 – Components of Net Periodic Benefit Cost
Benefit costs for defined pension benefit plans are shown below. Costs for other benefits include defined contribution pension plans and postretirement benefits other than pensions. The funding policy and expectations disclosed in the Company’s 2005 Annual Report on Form 10-K are expected to continue unchanged throughout 2006.
| | Three Months Ended June 30, | | Six Months Ended June 30, | |
| | Pension Benefits | | Other Benefits | | Pension Benefits | | Other Benefits | |
(in thousands) | | 2006 | | 2005 | | 2006 | | 2005 | | 2006 | | 2005 | | 2006 | | 2005 | |
Service cost – benefits earned during the period | | $ | 3,706 | | $ | 5,161 | | $ | 2,926 | | $ | 442 | | $ | 7,377 | | $ | 10,341 | | $ | 5,841 | | $ | 891 | |
Interest cost on projected benefit obligation | | 7,671 | | 7,240 | | 392 | | 307 | | 15,310 | | 14,497 | | 784 | | 614 | |
Expected return on plan assets | | (10,410 | ) | (9,104 | ) | | | | | (20,787 | ) | (18,222 | ) | | | | |
Amortization of unrecognized transition obligation | | 60 | | 80 | | | | | | 118 | | 162 | | | | | |
Amortization of prior service cost | | 650 | | 681 | | 172 | | (13 | ) | 1,297 | | 1,362 | | 345 | | (26 | ) |
Recognized actuarial net (gain) or loss | | 2,622 | | 2,480 | | 4 | | 34 | | 5,242 | | 4,963 | | 8 | | 67 | |
Settlement gain (loss) | | | | 141 | | | | | | | | 284 | | | | | |
Net periodic pension (income) cost | | $ | 4,299 | | $ | 6,679 | | $ | 3,494 | | $ | 770 | | $ | 8,557 | | $ | 13,387 | | $ | 6,978 | | $ | 1,546 | |
Note 7 – Accumulated other comprehensive income (loss)
The components of accumulated other comprehensive income (loss) are as follows:
(in thousands) | | June 30, 2006 | | December 31, 2005 | |
Foreign currency translation | | $ | 105,806 | | $ | 61,604 | |
Unrecognized gain on derivative, net of deferred tax benefit of $1,937 and $2,105 | | 3,028 | | 3,291 | |
Minimum pension liability, net of deferred tax benefit of $20,580 and $20,580 | | (32,189 | ) | (32,189 | ) |
Accumulated other comprehensive income (loss) | | $ | 76,645 | | $ | 32,706 | |
In connection with the issue of seven-year, $300 million notes in March 2005, we entered into a forward starting swap on February 3, 2005, in order to lock in an interest rate in advance of the pricing date for the notes. On March 14, 2005, in connection with the pricing of the notes, we terminated the swap and recorded the resulting gain of $6.1 million (pre-tax) on the balance sheet as a component of other comprehensive income. This gain will be amortized as a component of interest expense over the term of the notes.
Note 8 – Segments of Business
The Company’s business activities are organized around and aggregated into its two principal business segments, Flexible Packaging and Pressure Sensitive Materials. Both internal and external reporting conforms to this organizational structure with no significant differences in accounting policies applied. The Company evaluates the performance of its segments and allocates resources to them based primarily on operating profit, which is defined as profit before general corporate expense, interest expense, income taxes, and minority interest. A summary of the Company’s business activities reported by its two business segments follows:
| | Three Months Ended
June 30, | | Six Months Ended
June 30, | |
Business Segments (in millions) | | 2006 | | 2005 | | 2006 | | 2005 | |
Net Sales to Unaffiliated Customers: | | | | | | | | | |
Flexible Packaging | | $ | 767.6 | | $ | 724.8 | | $ | 1,507.9 | | $ | 1,413.0 | |
Pressure Sensitive Materials | | 166.5 | | 155.3 | | 328.1 | | 299.1 | |
| | | | | | | | | |
Intersegment Sales: | | | | | | | | | |
Flexible Packaging | | (0.1 | ) | (0.1 | ) | (0.2 | ) | (0.2 | ) |
Pressure Sensitive Materials | | (0.2 | ) | (0.1 | ) | (0.4 | ) | (0.1 | ) |
Total Net Sales | | $ | 933.8 | | $ | 879.9 | | $ | 1,835.4 | | $ | 1,711.8 | |
| | | | | | | | | |
Operating Profit and Pretax Profit: | | | | | | | | | |
Flexible Packaging | | $ | 88.6 | | $ | 80.7 | | $ | 159.5 | | $ | 150.6 | |
Pressure Sensitive Materials | | 14.8 | | 9.3 | | 29.5 | | 16.9 | |
Total operating profit | | 103.4 | | 90.0 | | 189.0 | | 167.5 | |
| | | | | | | | | |
General corporate expenses | | (9.1 | ) | (10.9 | ) | (19.4 | ) | (25.7 | ) |
Interest expense | | (13.1 | ) | (9.9 | ) | (25.9 | ) | (18.3 | ) |
Minority interest in net income | | (1.0 | ) | (1.1 | ) | (1.5 | ) | (2.4 | ) |
Income before income taxes | | $ | 80.2 | | $ | 68.1 | | $ | 142.2 | | $ | 121.1 | |
| | | | | | | | | |
Identifiable Assets: | | | | | | | | | |
Flexible Packaging | | | | | | $ | 2,583.4 | | $ | 2,434.1 | |
Pressure Sensitive Materials | | | | | | 373.9 | | 414.4 | |
Total identifiable assets | | | | | | 2,957.3 | | 2,848.5 | |
Corporate assets | | | | | | 154.5 | | 123.5 | |
Total | | | | | | $ | 3,111.8 | | $ | 2,972.0 | |
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Note 9 – Earnings Per Share Computations
| | Three Months Ended June 30, | | Six Months Ended June 30, | |
(in thousands, except per share amounts) | | 2006 | | 2005 | | 2006 | | 2005 | |
| | | | | | | | | |
Income available to common stockholders (numerator) | | $ | 48,907 | | $ | 41,236 | | $ | 86,710 | | $ | 73,460 | |
Weighted-average common shares outstanding (denominator) | | 104,829 | | 107,164 | | 104,894 | | 107,092 | |
| | | | | | | | | |
Basic earnings per share of common stock | | $ | 0.47 | | $ | 0.38 | | $ | 0.83 | | $ | 0.69 | |
| | | | | | | | | |
Dilutive effects of stock option and stock awards, including impact of windfall tax benefits | | 1,836 | | 1,376 | | 1,808 | | 1,384 | |
Weighted-average common shares and common equivalent shares outstanding (denominator) | | 106,665 | | 108,540 | | 106,702 | | 108,476 | |
| | | | | | | | | |
Diluted earnings per share of common stock | | $ | 0.46 | | $ | 0.38 | | $ | 0.81 | | $ | 0.68 | |
Note 10 – Legal Proceedings
The Company is involved in a number of lawsuits incidental to its business, including environmental related litigation. Although it is difficult to predict the ultimate outcome of these cases, management believes, except as discussed below, that any ultimate liability would not have a material adverse effect upon the Company’s financial condition or results of operations.
The Indiana Department of Environmental Management (IDEM) has issued a Notice of Violation to the Company regarding various permitting and air emissions violations at its Terre Haute, Indiana facility. The Company is cooperating with the Indiana agency and is seeking to resolve all open issues raised by the Notice of Violation. Any settlement or other resolution of these matters may include a penalty, although management believes that it would not have a material adverse effect upon the Company’s financial condition or results of operations. The Company has received a settlement proposal from IDEM and is currently evaluating this proposal.
The Company is a potentially responsible party (PRP) in twelve superfund sites around the United States. The Company expects its future liability relative to these sites to be insignificant, individually and in the aggregate. The Company has reserved an amount that it believes to be adequate to cover its exposure.
Dixie Toga S.A., acquired by the Company on January 5, 2005, is involved in a tax dispute with the City of São Paulo, Brazil. The City imposes a tax on the rendering of printing services. The City has assessed this city services tax on the production and sale of printed labels and packaging products. Dixie Toga, along with a number of other packaging companies, disagree and contend that the city services tax is not applicable to its products and that the products are subject only to the state value added tax (VAT). Under Brazilian law, state VAT and city services tax are mutually exclusive and the same transaction can be subject to only one of those taxes. Based on a ruling from the State of São Paulo, advice from legal counsel, and long standing business practice, Dixie Toga appealed the city services tax and instead continued to collect and pay only the state VAT.
The City of São Paulo disagreed and assessed Dixie Toga the city services tax for the years 1991-1995. The assessments for those years were estimated to be approximately $40.0 million at the date the Company acquired Dixie Toga. Dixie Toga challenged the assessments and ultimately litigated the issue. A lower court decision in 2002 cancelled all of the assessments for 1991-1995. The City of São Paulo, the State of São Paulo, and Dixie Toga have each appealed parts of the lower court decision. The City continues to assert the applicability of the city services tax and has issued assessments for the subsequent years 1996-2001. The assessments for those years for tax and penalties (exclusive of interest) were estimated to be approximately $26.0 million at the date of acquisition. In the event of an adverse resolution, these estimated amounts could be increased for interest, monetary adjustments, and corrections.
The Company strongly disagrees with the City’s position and intends to vigorously challenge any assessments by the City of São Paulo. The Company is unable at this time to predict the ultimate outcome of the controversy and as such has not recorded any liability related to this matter. An adverse resolution could be material to the results of operations and/or cash flows of the period in which the matter is resolved.
The Company first disclosed in a Form 8-K filed with the Securities and Exchange Commission on April 23, 2003, that the Department of Justice expected to initiate a criminal investigation into competitive practices in the labelstock industry and the Company further discussed the investigation and disclosed that it expected to receive a subpoena in its Form 10-Q filed for the quarter ended June 30, 2003. In a Form 8-K filed with the Securities and Exchange Commission on August 15, 2003, the Company disclosed that it had received a subpoena from the U.S. Department of Justice in connection with the Department’s criminal investigation into competitive practices in the
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labelstock industry. The Company has responded to the subpoena and will continue to cooperate fully with the requests of the U.S. Department of Justice.
The Company and its wholly-owned subsidiary, Morgan Adhesives Company, have been named as defendants in fourteen civil lawsuits. Six of these lawsuits purport to represent a nationwide class of labelstock purchasers, and each alleges a conspiracy to fix prices within the self-adhesive labelstock industry. On November 5, 2003, the Judicial Panel on MultiDistrict Litigation issued a decision consolidating all of the federal class actions for pretrial purposes in the United States District Court for the Middle District of Pennsylvania, before the Honorable Chief Judge Vanaskie. Judge Vanaskie entered an order which called for discovery to be taken on the issues relating to class certification and briefing on plaintiffs’ motion for class certification to be completed in December 2005. At this time a trial date has not been set. The Company has also been named in three lawsuits filed in the California Superior Court in San Francisco. These three lawsuits, which have been consolidated, seek to represent a class of all California indirect purchasers of labelstock and each alleged a conspiracy to fix prices within the self-adhesive labelstock industry. Finally, the Company has been named in one lawsuit in Vermont, seeking to represent a class of all Vermont indirect purchasers of labelstock, one lawsuit in Nebraska seeking to represent a class of all Nebraska indirect purchasers of labelstock, one lawsuit in Kansas seeking to represent a class of all Kansas indirect purchasers of labelstock, and one lawsuit in Tennessee, seeking to represent a class of purchasers of labelstock in various jurisdictions, all alleging a conspiracy to fix prices within the self-adhesive labelstock industry. The Company intends to vigorously defend these lawsuits.
In a Form 8-K filed with the Securities and Exchange Commission on May 25, 2004, the Company disclosed that representatives from the European Commission had commenced a search of business records and interviews of certain Company personnel at its self-adhesive labelstock operation in Soignies, Belgium to investigate possible violations of European competition law in connection with an investigation of potential anticompetitive activities in the European paper and forestry products sector. A formal request for information was received by the Company on October 28, 2005. The Company continues to cooperate fully with the European Commission.
Given the ongoing status of the U.S. Department of Justice investigation, the related class-action civil lawsuits, and the European Commission investigation, the Company is unable to predict the outcome of these matters although the effect could be material to the results of operations and/or cash flows of the period in which the matter is resolved. The Company is currently not otherwise subject to any pending litigation other than routine litigation arising in the ordinary course of business, none of which is expected to have a material adverse effect on the business, results of operations, financial position, or liquidity of the Company.
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